How do you create a realistic and attractive pro forma for your development project?

1 Know your market

The first step is to research your target market and understand the demand, supply, and competition for your product type and location. You need to identify the potential customers, their preferences, and their willingness to pay. You also need to analyze the existing and planned supply of similar products, and how they affect the market conditions and pricing. Finally, you need to assess the competitive advantages and disadvantages of your project, and how you can differentiate yourself from others.

2 Estimate your revenue

The next step is to estimate your revenue from your project, which is usually based on the rent or sale price of your units, the occupancy or absorption rate, and the growth or escalation rate. You need to use realistic and conservative assumptions, and avoid overestimating your income potential. You can use market data, comparable projects, and industry benchmarks to support your revenue projections. You should also account for any vacancies, concessions, or discounts that may reduce your effective income.

3 Calculate your expenses

The third step is to calculate your expenses, which include both the capital costs and the operating costs of your project. Capital costs are the one-time expenses that you incur to acquire, develop, and construct your project, such as land acquisition, site work, building materials, labor, permits, fees, financing, and contingency. Operating costs are the ongoing expenses that you incur to maintain and manage your project, such as property taxes, insurance, utilities, maintenance, repairs, management fees, and reserves. You should use detailed and accurate estimates, and factor in any inflation, escalation, or contingency that may increase your costs.

4 Analyze your cash flow

The fourth step is to analyze your cash flow, which is the difference between your revenue and your expenses over time. You need to create a cash flow statement that shows how much money you will generate or spend each month or year during the development and operation phases of your project. You should also calculate your net operating income (NOI), which is your revenue minus your operating expenses, and your net cash flow (NCF), which is your NOI minus your debt service payments. These are the key indicators of your project's profitability and viability.

5 Evaluate your return

The final step is to evaluate your return, which is the measure of how much money you will earn from your project relative to your investment. You need to use various metrics to assess your return, such as the internal rate of return (IRR), the net present value (NPV), the equity multiple, and the cash-on-cash return. These metrics help you compare your project's performance with other investment opportunities, and determine if it meets your financial goals and expectations. You should also perform a sensitivity analysis to test how your return will change under different scenarios and assumptions.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?